Retirement Planning

Retirement Planning Strategy

If you’ve read this far in the article, I’m sure you’ve already figured my next point out, but I’m going to say it anyway just to be clear: It’s never too early to start saving for retirement.

The longer you have to save, the easier it is. However, it’s also never too late to start, either. How you approach retirement planning changes with your age and how long you have until retirement. Below are some of the guidelines, but keep in mind that if you plan on retiring early, your plans might change.

Retirement Planning Strategy Chart

Stage in Life

Retirement Planning Strategy

In your 20's

Start contributing to your 401(k) and/or a Roth IRA. Be aggressive and invest in nearly all stocks, except for an emergency savings fund.

Meet with a financial advisor to come up with a plan if you haven’t done so.

Max out your 401(k) if possible and then switch to Roth IRA, since you’ll probably be in a lower tax bracket than when you retire.

In Your 30s–40s

In your 30s and 40s, put some of your savings into bonds, but keep the majority in stocks.

Pay attention to asset allocation and re-balance annually.

A general guideline is to put 10% of your income toward retirement savings—15% if you can afford it.

You’ll have a lot of places for your money to go all at once—house, childcare, education savings, and retirement. Speak to a financial advisor about how to balance all of these commitments and keep retirement on track.

In Your 50s

You’ll want a more conservative portfolio, since you’ll have less time to bounce back from a bad market.

Make a commitment to put at least 15% of your income to savings, hopefully more.

Pay attention to asset allocation and re-balance annually.

After Retirement

Speak with a financial advisor about how to make your savings last the rest of your lifetime. If you take out too much too quickly, you could be in trouble later.

If possible, wait as long as possible to start taking social security benefits.

Don’t forget to start making mandatory withdrawals from your traditional IRA at age 70½.

Compound Interest

When crafting you retirement planning strategy, always remember the magic of compound interest. People refer to it as the “magic” of compound interest because it’s almost too amazing to believe. Compound interest refers to when a person earns interest on his principal investments, and automatically reinvests the interests so that, in the future, he will earn interest on the principal plus reinvested interest. Repeat for 20 years or so, and it adds up! This is why it’s imperative to start saving early, so your money and interest does the work for you.

For example, you save $5,000/year from age 25-30. At age 30 you stop saving with a total of $25,000 set aside in stocks, mutual funds, and bonds. By age 65, assuming an 8% growth rate, your nest egg will have grown to $251,566.42.

In contrast, let’s say you save $10,000/year from age 45 to 50 for a total of $50,000. Even though you started with double the principal, by age 65 it will only have reached $158,608.

So get started saving now, and reap the almost magical benefits of compound interest!